United States: Is Your Accountant Registered With The PCAOB?

By: Martin Mushkin, Esq.

It has come to our attention that hundreds of accounting firms, which audit companies which are publicly owned in the U.S. have failed to register with the PCAOB. In July, 2002, Congress passed the Sarbanes-Oxley Act ("SOX"). SOX established a strict corporate governance regime for companies which are public in the U.S. SOX also established the PCAOB to provide federal oversight of the auditing of public companies. Among other things, auditors of such companies must register with the PCAOB. The law applies to auditors outside the U.S. if they are auditing companies, foreign or domestic, if they are public in the U.S.

U.S. based auditors had to register by October, 2003. Foreign accountants had to register by July 19, 2004. A list of public company auditors which have filed with the PCAOB can be seen at www.pcaobus.org/pcaob-registration.asp. The Board's electronic registration form can be accessed from that location.

Some auditors, especially those outside the U.S., may not want to register because once registered, they must comply with the Board's requirements that auditors limit their services to subject clients to auditing and some tax services. Registrants will also be subject to a full regulatory regimen enforced by inspections. For companies whose auditors do not want to register, there is a problem. This article only deals with the threshhold issue of the impact on a public company where the auditor has simply failed to register.

The form is quite straight forward. It requires standard information such as the headquarter’s address of the registering firm, other places of business, the officers of the registrant, the dates and places of their licenses, the names, addresses and licenses of the other accountants with the registrant, what public companies the firm has audited or expects to audit, or for which it performed substantial audit services in the last few years, what regulatory problems it has had, and the details of claims made in judicial proceedings concerning its professional work. The form requires the filing of a statement regarding the firm’s own professional quality control policies. It contains a place to request confidential treatment of specific materials. The amount of the filing fee depends on the number of clients audited.

Inquiry to the office of the SEC’s Chief Accountant reveals that each SEC division is establishing its own policy on this. The Office of the Chief Accountant of the Division of Corporate Finance takes the view that the financials will be deemed unaudited until an audit report regarding them is filed by a duly registered accountant.

SOX prohibits public accountants who are not registered with the PCAOB from auditing issuers. An accountant who undertakes auditing of an issuer, or expects to do so, should register forthwith. The PCAOB has 45 days from the date of application to pass upon the registration. You may rest assured that the PCAOB’s staff will read the filing and insist on correction of even the most mundane errors, such as misspellings of common words, or leaving required, but apparently inconsequential, spaces blank. Only when the application is approved or the 45 day period has passed will the accountant be deemed registered. A PCAOB FAQ sheet indicates that the 45 day period starts to run anew from the time additionally requested information is filed. Hopefully the will pass on routine error corrections well before the original 45 days passes.

Upon finding that an issuer has filed a document with the SEC containing an audit report by an accountant which has not registered with the PCAOB, the PCAOB will inform the accountant that it must register. The real problem occurs where the filing is one which must become "effective" after SEC review or the passage of a statutory review period, such as a ’33 Act registration statement, or proxy material. These filings can be very time sensitive. In these cases, the SEC will inform the company of the problem. Even if the accounting firm files its registration that very day, the effectiveness of the issuer’s filing may be delayed for that full 45 day period. Neither the PCAOB, nor the SEC posts the problem on EDGAR. (So who’ll know? Is that good or bad? Read on.) If the material filed by the issuer otherwise complies with the applicable filing requirement, and is correct; that is, does not contain any misleading statement of material fact , there is not likely to be any meaningful market repercussion – except the repercussion caused by the delay in effectiveness itself. For the issuer, delay can be penalty enough. For the accountant, it will be subject to the significant enforcement powers of the SEC and the PCAOB. But the subject of this newsletter is getting the issuer’s filing effective, not dealing with the auditors’ woes.

Here, the issuer will probably deem itself an innocent victim which just wants its filing declared effective ASAP.¹ The issuer must review its filings to make sure they otherwise comply with the filing requirements. Undoubtedly, the appropriate division of the SEC will provide any comments it has within the regulatory period, but there is still that pesky 45 period which may have to be waited out. In a case of rotting vegetables it might be possible to move the PCAOB for early approval, but no regulation directly provides for this.

Since a financial statement would have been accompanied by an audit report of a non-PCAOB registrant, a decision must be made by the SEC’s staff whether to recognize the audit report. We think that in most instances where the issuer needs an SEC declaration of effectiveness or SEC acquiescence by passage of time, late PCAOB registration should have no regulatory effect on the innocent issuer except delay, a heavy penalty in and of itself. In dealing with the SEC, it might be possible to argue that the audit report becomes valid automatically dating back to the date of the initial audit report, a sort of nunc pro tunc effectiveness. After all, the initial report was valid as an audit report. What was wrong with it was that the auditor had not registered with the PCAOB. That may simply have been a ministerial failure. But, the SEC’s staff may require that a new audit report be filed. A new audit report may cure the error. The latter could have a number of nuanced levels. If the old auditor is utilized, that should be very simple. If a new auditor is willing to accept work of the old auditor, the extent of its review will depend on the extent of the work done by the old auditor. In the case of an issuer with a small very detailed finite paper trail such as a small mutual fund, a review of the work of the old auditor will be easily done in a very short period of time. Indeed if the solution is only a re-dated audit report, the work to justify the new audit report can be done by a new auditor or by the old auditor shortly after its PCAOB registration is approved. A subsequent events note will be in order.

Some explanation by the issuer in its disclosure filings as to why this new or re-dated audit report is being filed may be necessary to provide full disclosure. Then again, since a re-dated audit report may not be material to the investing public it may not require any explanation. The ultimate question is would a reasonably prudent investor deem it material to making an investment decision? We submit that in cases not requiring declarations of effectives, if the total mix of information filed by the issuer is really full disclosure "under the circumstances" (a 10b-5 phrase), the failure of the public accountant to timely register with the PCAOB will not be material to a reasonably prudent investor. This is the conundrum for prudent counsel.

Issuers (and their counsel) should look up whether the issuer’s public accountant is registered. If it isn’t, better have a chat with your auditor’s liaison. Certainly, public accountants reading this will get the picture.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.